News Analysis

No clarity yet on time-barred debts under IBC

Radhika Merwin BL Research Bureau | Updated on March 26, 2018


Rulings by NCLT, NCLAT and the Supreme Court raise more questions than answers

The question whether the Limitation Act, 1963, is applicable to the proceedings under the IBC, has been raised a number of times, over the past several months.

Essentially, the Limitation Act says that if suits to recover debts are not filed within three years (normally) from the default, then they become time-barred. But varying rulings by the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT) and the Supreme Court have resulted in ambiguity over the matter. This can lead to insolvency applications, even in cases where the debt is time-barred.

The question of whether in case of time-barred debt, a creditor can invoke IBC, arose in the case of Neelkanth Township and Construction Pvt Ltd Vs. Urban Infrastructure Trustees Ltd, in 2017. Here, the financial creditor was an investor and a debenture holder of Optionally Convertible Debenture Bond payable on maturity which was issued by the corporate debtor. The zero-interest bonds maturing in 2011, 2012, and 2013, amounting to a total claim of ₹51 crore were not redeemed. On an application filed by the financial creditor, the debtor contended that the three-year limitation to seek remedy had expired.

But the NCLT, in this case, ruled that the Limitation Act does not apply to IBC proceedings. The NCLAT too dismissed the appeal by the corporate debtor, stating that the argument that it is time-barred by limitation is baseless.

Subsequently, the Supreme Court kept the question of the applicability of the Limitation Act, open.

NCLT view

While in the Neelkanth case, both the NCLT and the NCLAT, ruled that the Limitation Act does not apply to IBC, in some other cases, the NCLT has maintained a consistent view that in respect of time-barred debts, no action under IBC is possible.

In the case of Speculam Plast Pvt Ltd vs PTC Techno Pvt Ltd, the operational creditor had been providing electroplating services to the corporate debtor, who had failed to pay the outstanding amount against the invoices. The NCLT observed that the debt claimed was of 2013 and thus time-barred and hence, the application was dismissed.

However, the NCLAT overturned the NCLT ruling and held that the Limitation Act does not apply to IBC. In the Sanjay Bagrodia vs Sathyam Green Power Pvt Ltd case too, while the NCLT rejected the operational creditor’s application contending that it is barred by limitation, the NCLAT held that the Limitation Act is not applicable and allowed the creditor’s appeal.

Opposing views

While the NCLAT has mostly held that the Limitation Act does not apply to IBC, in effect permitting even time-barred debts under IBC, the various rulings have raised several questions.

“For instance, in the Speculam case, the NCLAT also held that the NCLT may take into account the doctrine of latches while considering an application for initiating the insolvency process. What this means is that a legal right will not be allowed in case of an unreasonable delay and the NCLT will have to decide on whether a debt is time-barred on a case to case basis,” explains KS Ravichandran, Managing Partner, KSR & Co, Company Secretaries LLP.

“It is good that NCLTs have taken a consistent view that in respect of time-barred debts no action under IBC is possible. The Supreme Court alone can bring the requisite clarity on this matter, and the earlier the better,” adds Ravichandran.

Some experts believe that there is also the question of who files for the insolvency under IBC.

“In case of a financial creditor or the corporate debtor there is a continuing default, and hence the question of limitation should not be relevant,” according to Vinod Kothari, a financial and legal consultant and insolvency professional. Therefore, if there is a continuing default, the very fact that the claimant is referring to a debt which is long past, does not mean the proceeding for insolvency becomes irrelevant, explains Vinod Kothari.

But in the case of an operational creditor (includes suppliers, employees and workmen), creditor has to first demand payment, and then file an application.

“If the operational creditor is making a demand for a time-barred claim, this is not valid. This is because if the creditor has lost rights in civil law, and gets a window of approaching under IBC, the time-tested principle of latches lose their relevance. Time-barred claims cost heavy on any generation,” says Vinod Kothari.

Published on March 26, 2018

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